Hon’ble Chief Minister’s speech and Presentation to 14th Finance Commission

Hon’ble Chief Minister Sri. K. Chandrashekar Rao speech and Presentation to 14th Finance Commission

Chairman of the Finance Commission Dr.Y.V.Reddy garu, distinguished members of the Commission, Prof. Abhijit Sen, Mrs. Sushma Nath, Dr. Govinda Rao and Dr. Sudipto Mundle, Secretary and officials of the Commission:

1. I have great pleasure in joining the Finance Minister Sri. Rajender in extending you all a warm welcome to the new State of Telangana, on behalf of the people of the State, my cabinet colleagues and the State Government officials. As all of you know, the new State of Telangana has come into existence on June 2,2014 after nearly six decade long relentless struggle, fulfilling the long cherished aspirations of nearly four crore people to establish their identity and chart their own future. Fulfilling the aspirations of the people, which remained suppressed so far, is the major challenge before my government. We want to reinvent and reorient Telangana for this purpose. The institution of the Finance Commission has a formidable reputation of nurturing the spirit of cooperative fiscal federalism and successfully adjudicating the claims of the Centre and States in a fair and equitable manner. We have very high hopes on the Fourteenth Finance Commission headed by Dr. Y.V. Reddy in resolving all contentious issues in Indian fiscal federalism and heralding a new era,given the imperative of empowering the States fiscally to realize the Twelfth Five-Year Plan objective of faster, more inclusive and sustainable growth.

2. Let me at the outset present to you the current status of the State. The native wisdom of harnessing the local resources for development has ended with the rule of Kakatiyas and Asaf Jahis. The neglect of Telangana in the combined State has been brought out vividly in a study by the Planning Commission which observed that balanced development of the State had become a casuality and regional imbalances went on increasing because of the lopsided policies. As indicated in our memorandum, all the Committees entrusted with the task of identifying backward areas in the country by the Government of India have categorized majority of the districts in Telangana as backward. Nine out of the ten districts in the State are covered under the Backward Regions Grant Fund (BRGF). The Twelfth Five-Year Plan document by the Planning Commission has categorized two districts in the State, namely, Khammam and Mahbubnagar as ‘Most Hungry’. Backwardness still haunts the State, six decades after the formation of the combined state. Eighty six percent of State’s population belong to SCs, STs and backward classes. Despite its backwardness, an erroneous impression has gained ground about the revenue potential of Hyderabad in particular and Telangana in general. As articulated in detail in our memorandum, the higher revenue collections in Hyderabad was entirely because of the practice of all major VAT dealers paying their tax in Hyderabad for sales taking place all over the State and not because of higher revenue potential. I request the Commission to appreciate the fact that the revenue potential of Telangana is quiet limited as majority of the districts in the State are economically backward and added to this, there will be erosion of tax base in the short to medium term.

3. In the last few years, there has been deceleration in the growth of the State economy. The growth of the economy slipped from 10.5 percent in the period 2005-06 to 2009-10 to 4.5 percent in 2012-13. The major challenge before the State Government is not only to regain the growth momentum but also make it inclusive. I firmly believe that growth has no meaning and even legitimacy if the deprived sections of the society are left behind. We fully share the concern of the Twelfth Five-Year Plan that inclusive growth should not only ensure a broad based flow of benefits and economic opportunities, but also encompass empowerment and participation. The initiatives taken by the Government since the formation of the State in June this year have entirely been guided by these compelling imperatives.

4. Now, I will briefly touch upon the initiatives taken by the State Government. The economic condition of the scheduled castes has not improved much despite several programmes. We are convinced that there cannot be a better policy measure to address their poverty on a permanent footing than providing them with a permanent source of livelihood, particularly in rural areas. We have formulated a scheme for providing 3 acres of agricultural land to landless SC women by purchasing land. The scheme was formally launched in the State on 15th August, 2014. In the next phase, SC households owing less than 3 acres will be provided the balance extent of land. The land so distributed will also be provided with permanent irrigation facilities and cost of inputs for one crop year. The Government is planning to provide Rs.50,000 crore for the development of SCs over the five-year period of 2014-19. The condition of the STs is no better and to improve their condition, 12 percent reservation will be provided to them in government jobs. People belonging to backward classes constitute the majority of State’s population and we are determined to provide Rs. 25,000 crore for their development over the next five years. Minorities in the State continue to suffer from several constraints. We have, therefore, decided to provide an amount of Rs.1,000 crore every year for their welfare.

5. With recurrent natural calamities and rising input costs, agriculture in the State is in dire straits driving the farmers to suicides, the incidence of which is one of the highest in the country. Agriculture in Telangana, while contributing 14 percent to Gross State Domestic Product (GSDP), provides direct and indirect employment to over 50 percent of State’s population. With the neglect of tanks over the years, over 84 percent of the net sown area is dependent on well irrigation. With depleting ground water, agriculture in the State is proverbial gamble in monsoon. One of the banes of agriculture is declining private and public investment. We have drawn up an ambitious plan to take up restoration of over 48,000 tanks in the State as a lasting solution.The scope for private investment in agriculture is very limited because of uncertain returns and high incidence of farmer indebtedness in the State. Infusion of investment is the surest way to enhance agricultural productivity, which besides breaking the vicious cycle of rural poverty could also address the macroeconomic problem of persistent high food inflation. Keeping in view this imperative, we are implementing the farmer debt relief scheme.

6. The State Government is of the firm view that industrialization holds the key for higher and sustainable growth. We are in the process of unveiling an investor friendly industrial policy. We have already identified surplus government land suitable for industrial use in all the districts of the State. Despite the suitability of the State for location of industry, power shortage in the State is a major hurdle. We need huge investments to build sufficient generating capacity to overcome power shortage in the State. Another important initiative is the establishment of Drinking Water Grid to provide every household in the State with a piped drinking water connection. For this purpose, we want to earmark 10 percent of water in all irrigation projects for drinking and to link all the projects and habitations through a network of pipelines.

7. We are committed to ensure that every paise spent on welfare programmes reaches the deserving beneficiaries. It is a matter of grave concern that the number of white ration cards in the State exceeded the number of census households. There were a number of misapprehensions when we took up a Comprehensive Household Survey on August 19, 2014 for the purpose of identifying the deserving. In an unprecedented manner, the survey was completed on a single day with the overwhelming and willing participation of people. The survey will help us in better targeting welfare programmes and in saving scarce government resources.

8. To maintain ecological balance and to protect the environment, the Government has decided to increase green cover all over the State. “Telangana ku Harita Haram”, a flagship programme of the State Government envisages to increase the tree cover in the State from the present 25.16 percent to 33 percent of the geographical area. The programme is sought to be implemented through a multi-pronged approach of rejuvenating degraded forests, ensuring more effective protection of forests, intensive soil and moisture conservation measures and social forestry by taking up massive plantation activities. It is proposed to plant 230 crore saplings in the State over the next three years. Nurseries numbering 3,699 have already been identified for raising adequate nursery stock. A target of raising 40 lakh saplings has been fixed for each Assembly Constituency.

9. Let me now present my views on the mandate of the Finance Commission; sharing of resources between the Centre and the States. The ultimate test of sharing of resources is the final outcomes as measured by the enhanced welfare of people. I feel that it is more relevant to consider the allocation of available resources between functional responsibilities assigned to the States and Centre under the Constitution. With focus on inclusive growth, the commitments of States have increased considerably. As most of the sectors touching on the lives of the people fall within the purview of States, there is an imperative to align resources in favour of States. There is another compelling reason for a paradigm shift in resource sharing in favour of States as there has been considerable increase in the non-tax revenues of the Centre from off-shore royalties, sale of spectrum and disinvestment proceeds. Besides, there has been a reduction in the size of the divisible pool because of the levy of cesses and surcharges by the Centre. This has neutralized the increases in States’ share in Central tax revenue recommended by the successive Finance Commissions somewhat. Despite the imperative to empower States and growing vertical imbalances, there has been remarkable stability in the shares of States and Centre in combined revenues. I request the Finance Commission to be a trail blazer ushering in an era of resource transfers based on Constitutionally assigned responsibilities.We request the Commission to earmark 40 percent of Central tax revenue as tax devolution to States. This can easily be accommodated by a marginal reduction of 5 percent in the Centre’s expenditure on State subjects.

10. I will now briefly touch upon the horizontal distribution of resources across States. Successive Finance Commission have been assigning higher weightage to equity parameters as a result which the share of middle-income states in tax devolution has witnessed a massive erosion. Better performing States have lost out heavily because of higher weightage to distance of per capita income or its variants. States are being penalized for improving the growth of their economies and per capita incomes. Undue weightage to equity parameters far from resulting in any reduction in income inequalities across States has disincentivised better performing States. I feel that issues of income inequalities need to be addressed through specific schemes tailored to meet the requirements of backward States and special development packages and not through tax devolution. There is a need to reduce the weightage assigned to equity parameters substantially.

11. We are of the firm view that population and area represent the needs of a State in terms of provision of public goods and services more than any other indicator. There is no subjectivity with regard to their measurement and application in the tax devolution formula. We propose that weights of 25 and 30 percent may be assigned to population and area, respectively. We request that only 2011 should be taken into account for the purpose of tax devolution instead of 1971 population, which is more than 40 year old. The population criterion is entirely need based and the needs can be taken care of better only if the current population is taken into account. The Government has to cater to the needs of the present population and not to the notional 1971 population. The use of 1971 population penalizes States like Telangana which witnessed a lot of migration from the other regions of the erstwhile State of Andhra Pradesh and other parts of the country. The share of Telangana in the combined population of the erstwhile State which was 36.37 percent in 1971 increased to 41.69 percent in 2011 entirely on account of migration, while that of Andhra region declined from 63.63 to 58.31 percent in the same period. Migrants are attracted to a State because of income earning opportunities and the States receiving migrants should not be penalized for no fault of theirs. This is double whammy for the migrant receiving States as they have to cater to the needs of increasing population and face a cut in their share of tax devolution.

12. Own resources of a State are an important component of total resources and States that exploit their revenue potential better need to be incentivized in a big way. I, therefore, propose that a weight of 17.5 percent be assigned to fiscal discipline.

13. Let me now present our concerns and views with regard to the additional matters referred to the Commission. The Commission has been asked to suggest amendments to FRBM Acts currently in force and to recommend incentives for States observing the norms laid down in the Acts. States have been scrupulously following the norms not because of a comfortable fiscal position but because of compulsion as state specific grants and interest relief on small saving loans are conditional on such observance. Because of mechanical observance of norms, the quality of fiscal adjustment has suffered. We, therefore, request the Commission to reward the States based on the quality of fiscal adjustment, more particularly where the fiscal adjustment is revenue led. The Centre has amended its Act and set its revenue deficit target with reference to revenue expenditure adjusted for grants for asset creation. A similar dispensation needs to be extended to States. Another issue that I want to highlight is that States should be allowed more fiscal headroom, particularly in the case of newly formed states, by allowing relaxations in the FRBM norms.

14. Another additional matter referred to the Commission relates to reviewing of debt levels of States and suggesting measures for sustainable fiscal environment. Termination of Central loans to States and consequent higher reliance on market borrowing with a much shorter tenor has adversely impacted the debt servicing burden. Added to this, the bunching of repayments from 2017-18 will also impact the States. The restructuring of state power distribution companies will also add to the debt burden of the State. The servicing burden of externally aided projects has also increased considerably because of the Rupee depreciation. Taking into account these developments, I request the Commission to recommend writing off of outstanding Central loans to the State.

15. As elaborated in our memorandum, our State is highly vulnerable to droughts and natural calamities. There has been a recurrence of one calamity after another in the last six years breaking the backbone of the farmers. We request the Commission to take in to account State’s vulnerability to drought rather than the past expenditure for arriving at the size of the State Disaster Response Fund (SDRF). The Centre’s contribution may be increased from the present 75 to 90 percent. The size of the Fund need to be at least doubled going by the incidence of disasters in the last six years. To take care of inflation, an annual increase of 15 percent may be allowed. The practice of the Central Government in adjusting 75 percent of the balance available in the SDRF before releasing money from the National Disaster Response Fund may be dispensed with. Such practice will deprive the States of their rightful share and constrain them in providing relief on the occurrence of other calamities in the same year.

16. I will now briefly touch upon some of the considerations specified in the ToR. The Commission has been asked to take into account the need for insulating the pricing of public utilities such as drinking water, power, transport and irrigation from policy fluctuations through statutory provisions. I strongly feel that any such insulation will result in depriving the poor access to public services.

17. The ToR mandate the Commission, among others, to take into account the level of subsidies and their equitable distribution between the Centre and the States. There is no clarity as to what constitutes a welfare measure and a subsidy. Provision of subsidies and welfare measures is relative to the felt needs of the people and these vary widely across States. Therefore, I feel that there cannot be an objective assessment of the level of subsidies required. As brought out in a study by the National Institute of Public Finance and Policy, nearly three-fourths of the merit subsidies are being provided by the States and that the subsidies being provided by the Centre are mostly in the non-merit category. There is a strong case for Centre sharing a part of the merit subsidy burden of States.

18. We are of the firm view that there is an imperative to empower the local bodies to ensure better delivery of services and to address the locally felt needs of people. The grants to local bodies may be increased from the present level of 2.5 per cent of the divisible pool to at least 4 percent.

19. We favour the introduction of GST provided it is ensured that there is no accentuation of vertical imbalances and compromise of autonomy of States. We are very particular that an adequate compensatory mechanism is put in place. The important issue is to strike a balance between the autonomy of States and the need for harmonization of taxes across the common market of India. As recommended by the Parliamentary Standing Committee, States should be allowed flexibility in deciding the rates of GST within a floor rate and a band. Petroleum and liquor may be kept out of the purview of GST. We also request immediate payment of CST compensation dues to assure the States of the commitment of the Centre in fully compensating the States for the possible loss of revenue on the introduction of GST.

20. Let me conclude by reiterating the observation of the Sixth Finance Commission that when the emphasis is on social justice, there is no escape from the realignment of resources in favour of States because the services and programmes which are at the core of more equitable social order come within the purview of States under the Constitution. I assure the Commission that we are exploring every option for raising additional resources to carry forward the initiatives that my government has taken in furtherance of the cause of equitable social order. We have appointed a Task Force to identify the avenues for additional resources. But given the constraints and lack of adequate avenues, we need a helping hand from the Finance Commission. I am sure that the Commission under the able leadership Dr. Y.V.Reddy garu will be guided by the imperative of aligning resources in favour of States.

In the aftermath of the global financial crisis, Nobel Laureate Joseph Stiglitz remarked that if America had a central banker like Dr. Reddy, it would not have been placed in such a difficult position. With such credentials, we are very confident that the Fourteenth Finance Commission will usher in a new era of need based fiscal federalism. I thank the Commission for making it convenient to visit the State despite a very hectic schedule and hope all of you have a comfortable stay in this historic city of Hyderabad.